25 Aug Ontario Court Appeal Rules – Insurer Denied Coverage w/ Expired Licsence
Last week, the Ontario Court of Appeal released a decision that is important to automobile insurers. While you may logically assume that insurance coverage is rightfully denied when the insured drives with an expired license, the Ontario Court of Appeal disagrees. The Court has ruled that having a valid driver’s license is not a condition precedent to being insured under the Ontario Automobile Policy. A careful analysis by the adjuster and legal counsel is therefore required when considering whether the court will grant relief against forfeiture. Particularly when the court considers the insured’s breach of condition to have been “relatively minor,” the court is likely to grant relief to the insured.
Kozelv.The Personal Insurance Company
Seventy-seven year-old Ms. Kozel severely injured a motorcyclist in an automobile accident in Florida. She was driving with an expired driver’s license. The Personal Insurance Company took the position that Ms. Kozelwas in breach of statutory condition 4(1) of her Ontario Automobile Policy, which reads:
“The insured shall not drive or operate or permit any other person to drive or operate the automobile unless the insured or other person is authorized by law to drive or operate it.”
The Personal Insurance Company accordingly reserved its rights. The motorcyclist commenced an action in Florida against Ms. Kozel, who in turn brought an application against The Personal for a declaration that the insurer was obliged to defend and indemnify her under her contract of insurance.
Justice T.M. Wood, hearing the case at first instance,ruled that the insurer had a duty to defend and a duty to indemnify. The judge also orderedthe insurer to reimburse Ms. Kozel for the expense she had incurred defending the Florida litigation.
In Ontario, driver’s licenses must be renewed every five years by the driver’s birthday. Ms. Kozel’s birthday was October 7, 2011. In August of 2011 Ms. Kozel received an envelope in the mail from the Ministry of Transportation. She placed the envelope in her china cabinet- unopened. On September 24, 2011, Ms. Kozel purchased a new automobile and brought the envelope with her to the car dealership. She later gave evidence that she believed she gave the envelope to the dealership to enable it to license the new car. She remembered opening the envelope but not whether the envelope contained any documentation pertaining to the renewal of her driver’s license. The envelope did contain information regarding license plate sticker renewal.
The motor vehicle accident occurred on February 16, 2012. Ms. Kozelwas charged in Florida with driving with an expired license. The charge was dismissed or withdrawn because the Florida legislation provided a six month grace period before charges were laid for expired licenses. Three days after the accident, Ms. Kozel returned to Canada and renewed her license.
The Decision of Justice T. M. Wood
Ms. Kozel made several arguments before the applications judge. She argued that she was entitled to coverage pursuant to section 129 of the Insurance Act or section 98 of the Courts of Justice Act for relief against forfeiture. Justice T. M. Wood rejected this argument assection 129 of the Insurance Act only applies to imperfect compliance after a loss had occurred. He also ruled that section 98 of the Courts of Justice Act did not apply because clause 4(1) was a fundamental term of the insurance policy.
The Applications judge nevertheless ruled that there was coverage. Justice Wood accepted Ms. Kozel’s argument that because the offence of driving without a license is one of strict, rather than absolute liability, a due diligence defence was available to Ms. Kozel. After considering the facts described above. His Honourfound that Ms. Kozel exercised sufficient diligence and was not in breach of statutory condition 4(1). He stated that “While [Ms. Kozel]’s actions do not amount to perfect diligence of the ideal citizen they are a far cry from… complete passivity.”
Two other arguments by Ms. Kozel were rejected by Ms. Wood but were not considered by the Court of Appeal.
Ms. Kozel’s argument that she was not in breach of her policy as she was authorized to drive at the time of the accident under Florida law (due to the six month grace period for expired licenses) and the argument that they were estopped from denying coverage as they had made a payment towards Ms. Kozel’s property damage claim.
The Ontario Court of Appeal’s Decision
The Personal appealed Justice Wood’s ruling. There were two issues before the Court of Appeal:
Was Ms. Kozelentitled to a “due diligence” defence?
Was Ms. Kozelentitled to relief against forfeiture pursuant to section 98 of the Courts of Justice Act?
Ms. Kozel’s counsel conceded that Section 129 of the Insurance Act did not assist Ms. Kozel.
The Ontario Court of Appeal upheld Justice Wood’s ruling, although on a different basis.
Justice H. S. LaForme, for example, disagreed that Ms. Kozel was entitled to a due diligence defence. His Honour reasoned that for an individual to make out this defence he or she must show a reasonable misapprehension of facts or reasonable care with respect to the offence with which he or she is charged.In this case, the respondent would have had to show that she acted reasonably with regard to the expiry of her driver’s license.
At the time of the accident, Ms. Kozel was 77 years old. She had a driver’s license since she was 17 or 18 and always renewed it on time. However, on this occasion there is no evidence that she did anything to inquire about or even consider her driver’s license renewal. The absence of any reasonable care distinguished this case from those where a due diligence defence was found to exist in similar circumstances.Ms. Kozel’sevidence in support of her “due diligence” position was limited to having received an envelope from the Ministry of Transportation and failing to immediately open it. When Ms. Kozel later openedthe envelope, she remembered only seeing documentation for her plate stickers. She had recently produced her driver’s license on two occasions (when purchasing her vehicle and at her lawyer’s office) but did not look at it on either date. This evidence only demonstrated that she took reasonable diligence regarding her plate renewal. It did not support an argument that she took reasonable care or was under a reasonable misrepresentation regarding the renewal of her driver’s license.
The Court of Appeal nevertheless ruled that the insurer was obliged to defend and indemnify Ms. Kozel. The panel relied on section 98 of the Courts of Justice Act,which gives the court discretion to grant relief against forfeiture.
The remedy of relief against forfeiture is equitable in nature and purely in the discretion of the Court. In insurance cases, the purpose of the remedy is to “prevent hardship to beneficiaries where there has been a failure to comply with a condition for receipt of insurance proceeds and where leniency in respect of strict compliant with the condition will not result in prejudice to the insurer.”In order to grant relief against forfeiture the court must consider three factors:
the conduct of the applicant;
the gravity of the breach; and
the disparity between the value of the property forfeited and the damage caused by the breach.
Relief against forfeiture does not apply when there has been a breach of a “condition precedent”. A condition precedent is a condition which much be satisfied in order for insurance coverage to be provided under the terms of the policy. Ms. Kozel argued that a breach of statutory condition 4(1) is merely imperfect compliance with a policy term, rather than a breach of a condition precedent. Further, if she was denied coverage her personal assets would be exposed in this litigation and the insurance company would enjoy a “large and unwarranted windfall.” The Court of Appeal agreed.
The Court ruled:
[M]y view is that in this case, the respondent’s breach of statutory condition 4(1) is not non-compliance with a condition precedent. There are no grounds to believe that 4(1) is a fundamental term or that the respondent’s breach of it was of a fundamental nature. While the provision is a condition in name, the appellant pointed to no language in the contract stressing that the insurance coverage was conditioned on the claimant being authorized to drive….. Neither was the respondent’s breach here a fundamental one. Had the respondent’s violation of statutory condition 4(1) been more substantial – for example, if she had been drinking heavily prior to driving – she may have been barred from obtaining relief from forfeiture. This case, however, involves a relatively minor breach.
The Court also considered whether section 98 of the Courts of Justice Act should apply to contracts regulated by the Insurance Act, which contains its own relief against forfeiture section. The Court found that:
…[Section] 129 of the Insurance Act is restricted to instances of imperfect compliance with terms of a policy after a loss has occurred;
it has no application to cases where the breach occurred before the loss. As a consequence, a person who loses coverage because he or she was driving with an expired license, or because he or she failed to make a premium payment cannot rely on s. 129 for relief. That s. 129 leaves individuals like these – who have acted in good faith and whose breaches are relatively minor – without a remedy gives force to the argument that s. 98 should be operative in insurance cases. Thus, in the absence of clear legislative intent indicating that s. 129 of the Insurance Act applies to the exclusion of s. 98 of the CJA, I would hold that the latter provision is available as an avenue of relief for contracts governed by the Insurance Act.
Given the above legal findings, the Court of Appeal applied the relief against forfeiture test under section 98 of the Courts of Justice Act to the facts of this case.
The Court found that Ms. Kozel’s conduct in this case was reasonable. Up until October 7, 2011, her driver’s license was valid, and as soon as she discovered that her license had expired she sought to renew it and had no difficulty doing so. Moreover, she had always paid her premiums in a timely manner and acted in good faith on all occasions. This was the only instance in her extensive driving history where she had failed to renew her license in a timely manner.
The Court also found that this was not a serious breach of Ms. Kozel’s insurance policy. The breach had no impact on her ability to drive safely or on the contractual rights of the insurance company.
Finally, the disparity between the benefit forfeited and the damage caused by the breach was “enormous”. Ms. Kozel would lose $1,000,000 in insurance coverage, while the breach of statutory condition 4(1) caused no prejudice to the insurance company.
Accordingly, the Ontario Court of Appeal ruled,the insurer was obliged to defend and indemnify Ms. Kozel, reimburse her for her expenses in defending the Florida lawsuit and liable to pay her costs of the Ontario proceeding.
There are at least three lessons in this case for insurers and their counsel:
First, it is clear that not every breach of a policy of insurance will allow an insurer to deny coverage. Unless it can be demonstrated that the breach was of a condition precedent, the Court will consider whether the insured should be granted relief against forfeiture.
Second,it is important to go through the entire coverage analysis outlined above as the result may be surprising. I would have presumed that having a valid driver’s license would be an “obvious” condition precedent to having motor vehicle insurance coverage. However, a review of the legislation and the Ontario Automobile Policy does not make that clear. If there is any ambiguity in the policy language, the wording of the policy is interpreted in favour of the insured.
Third, although the Court in this case found that a due diligence defence did not exist on the facts, the Court did hold that such a defence continues to exist. Therefore, if an insured can produce evidence that he or she had taken reasonable care to fulfill a policy provision or that he or she was under a reasonable misrepresentation regarding his or her obligations, the Court may find there is coverage.
If you have any questions or concerns regarding this important decision, please do not hesitate to contact our office.
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